TMI Blog1976 (11) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... and in the circumstances, the Appellate Tribunal was right in law in holding that the initial depreciation should not be deducted in determining the written down value of assets for computation of capital employed in the newly established industrial undertaking under rule 19 of the Income-tax Rules, 1962 ?" The assessee is a limited company engaged in the manufacture of electrical equipments like generators, starters, regulators, etc., and distributors for commercial vehicles, tractors, cars and motor cycles. It entered into a technical collaboration agreement dated June 6, 1962, with a foreign company, Messrs. Joseph Lucas (Industries) Ltd., England, hereinafter referred to as the foreign company. The foreign company granted to the assessee the exclusive right and licence to make, use, exercise and vend items of the electrical equipment for vehicles and engines and service tools. The agreement which has been annexed to the statement of the case marked annexure "A" contains several clauses which will give a clue as to the nature of the arrangement arrived at between the parties. In the agreement the foreign company is termed as "the grantor" and the assessee is termed as "the lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d remain unpaid for a period of thirty days after the same became payable as therein referred to, whether or not a formal demand therefor shall have been made by the grantor, the grantor can terminate the licence. Clause 10(b) provided for termination in the event of bankruptcy, etc., of the licensee. Clause 10(c) also enabled the grantor to terminate the licence if the licensee granted a sub-licence or assigned the agreement or the licence, contrary to the terms of the agreement in favour of a third party. Clause 7(a) deals With payments to be made under the agreement. Under clause 7(a)(i), in consideration of the technical services rendered by the grantor, a fee amounting to one per cent. of the factory cost of all licensed devices and spare parts for such devices manufactured and sold by the licensee shall be paid by the licensee to the grantor. Under clause 7(a)(ii), in consideration of the licences and other rights granted under the agreement in respect of the scheduled patents and the grantor's designs, a royalty amounting to two per cent. of the factory cost of all licensed devices and spare parts for such devices manufactured and sold by the licensee shall be paid by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion confidential set out in the agreement in sub-clause 7(i) shall continue indefinitely. Clause 14(d) provided that if the licensee had stock in hand of the licensed devices at the date of termination, it might within one year after the date of termination dispose of such stock and its obligations regarding payment of royalties, keeping of records and submission of reports shall be deemed to continue in respect of such stock in hand, so disposed of. It is with reference to this agreement the assessee claimed amounts which it paid by way of fees and royalties provided for in clause 7(a) of the agreement, as deductible expenditure in the computation of the profits or gains. The Income-tax Officer held that 50% of such expenditure was capital in nature as it brought into existence an enduring asset, namely, necessary information for the manufacture of the patented articles, and therefore only 50% of the amounts paid by the assessee could be allowed as deduction. However, on appeal preferred by the assessee, the Appellate Assistant Commissioner held that the assessee had not acquired any capital asset or derived any enduring benefit under the technical collaboration agreement and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry of the period; (b) the object of the agreement was to obtain the benefit of the technical assistance for running the business; (c) the licence was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other persons; (d) the assessee was expressly prohibited from divulging confidential information to third parties without the consent of the Swiss company; (e) there was no transfer of the fruits of research once and for all ; the Swiss company which was continuously carrying on research had agreed to make it available to the assessee; and (f) the stipulated payment was recurrent dependent upon the sales, and only for the period of the agreement." The Supreme Court also pointed out at page 700: " The assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss company for a limited period : by making that technical knowledge available the Swiss company did not part with any asset of its business nor did the assessee acquire any asset or advantage of an enduring nature for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the opinion that the present case is on all fours with Ciba's case [1968] 69 ITR 692 (SC), decided by the Supreme Court, referred to already. Consequently, we hold that the entire payments made by the assessee to the foreign company will be in the nature of licence fee and, therefore, will constitute an item of expenditure in the computation of its profits and gains. The result is, as far as the first question is concerned, we answer the same in the affirmative and in favour of the assessee. As far as the second question is concerned, it turns upon the construction of rule 19 of the Income-tax Rules, 1962. Rule 19(1) states that for the purpose of section 84, the capital employed in an undertaking or a hotel to which the said section applies shall be taken to be-in the case of assets acquired by purchase and entitled to depreciation-if they have been acquired before the computation period, their written down value on the commencing date of the said period. Rule 19(6) defines the expression, "written down value" in clause (iv) thereof, as, meaning "written down value computed under sub-section (6) of section 43 as if for the words 'previous year' the words 'computation period' we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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